Most popular posts
- What makes great boards great
- The fate of control
- March Madness and the availability heuristic
- When business promotes honesty
- Due diligence: mine, yours, and ours
- Alligator Alley and the Flagler (?!) Dolphins
- Untangling skill and luck in sports
- The Southeastern Growth Corridors
- Dead cats and iterative collaboration
- Empirical evidence: power corrupts?
- A startup culture poses unique ethical challenges
- Warren Buffett and after-tax returns
- Is the secret to national prosperity large corporations or start-ups?
- This is the disclosure gap worrying the SEC?
- "We challenged the dogma, and it was incorrect"
- Our column in the Tampa Bay Business Journal
- Our letter in the Wall Street Journal
Other sites we recommend
Category Archives: Entrepreneurship
Today marks the 48th anniversary of the Apollo 11 landing and the first steps by humanity on another world. In honor of the man who took those first steps, we’d like to reprint the 8/28/12 piece we wrote on the occasion of his passing.
Astronaut Neil Armstrong passed away Saturday, and The Wall Street Journal reported something the pioneer once said about the success of the 1969 Apollo 11 mission – the odds of which he had placed at 50/50.
Mr. Armstrong described the required reliability of each component used in an Apollo mission – statistically speaking 0.99996, a mere 4 failures per 100,000 operations – and pointed out that such reliability would still yield roughly 1000 separate identifiable failures per flight. In reality, though, they experienced only 150 per flight. What explained the dramatic difference?
I can only attribute that to the fact that every guy in the project, every guy at the bench building something, every assembler, every inspector, every guy that’s setting up the tests, cranking the torque wrench, and so on, is saying, man or woman, “If anything goes wrong here, it’s not going to be my fault, because my part is going to be better than I have to make it.” And when you have hundreds of thousands of people all doing their job a little better than they have to, you get an improvement in performance. And that’s the only reason we could have pulled this whole thing off. . . .
When I was working here at the Johnson Space Center, then the Manned Spacecraft Center, you could stand across the street and you could not tell when quitting time was, because people didn’t leave at quitting time in those days. People just worked, and they worked until whatever their job was done, and if they had to be there until five o’clock or seven o’clock or nine-thirty or whatever it was, they were just there. They did it, and then they went home. So four o’clock or four-thirty, whenever the bell rings, you didn’t see anybody leaving. Everybody was still working.
The way that happens and the way that made it different from other sectors of the government to which some people are sometimes properly critical is that this was a project in which everybody involved was, one, interested, two, dedicated, and, three, fascinated by the job they were doing. And whenever you have those ingredients, whether it be government or private industry or a retail store, you’re going to win.
Interested, dedicated, fascinated by the job – Armstrong’s explanation could serve as an excellent description of the esprit de corps we find in good private growth companies. Not too long ago we quoted Ben Dyer, president of Techdrawl, about how entrepreneurs need to inspire all the members of their team to share the founder’s drive in the early stages of a company:
All those textbook methods of performance reviews, pay incentives, etc. will come in handy when you get to the 50th or 100th employee, but right now you’ve got to be the one out front – with inexhaustible energy, enthusiasm, creativity, and a clearly articulated vision.
Cohesion and esprit de corps are even more intangible. Where teamwork is built on the willingness of individual team members to subsume their own interests in favor of group interests, esprit de corps is built upon the willingness to sacrifice oneself, if needed, for the interests of the group. This is a level of commitment that few organizations in business achieve.
Mr. Armstrong described himself (with characteristic humility) as: “I am, and ever will be, a white-socks, pocket-protector, nerdy engineer.” Perhaps that, and a bit more, Sir. Godspeed.
On this day in 1928, the Chillicothe Baking Company of Chillicothe, MO, sold mechanically sliced bread for the first time in the history of the universe. This gives us a great opportunity, on a Friday, to re-post a Greatest Hit from our Vintage Future Series – originally published on November 13, 2014:
Our Vintage Future series takes a tongue-in-cheek look back at the failed predictions of past generations of investors and futurists, and the sometimes tortuous routes to success of unlikely ideas.
In our line of work it’s good to guard against the hubris inherent in projecting conventional wisdom too far out into the future, and to remind ourselves that today’s trend can be tomorrow’s punchline – and vice versa.
Our VIIth installment takes a look at “the greatest thing” ever invented and a simple innovation that dramatically altered how we see the world.
Even sliced bread took 18 years to succeed. Otto Frederick Rohwedder, a jeweler from Missouri, built his prototype “Machine for slicing an entire loaf of bread at a single location” in 1912 but saw it destroyed in a fire. 15 years later he filed his patent, but the end product languished due to its untidy appearance and concerns about freshness. One year later a St. Louis baker named Gustav Papendick put it in cardboard trays and wrapped it in wax paper, yet even then it didn’t take off until it helped a little company called Wonder Bread go national in 1930.
Except for a brief ban during WWII (the steel used to build the slicers had more pressing uses), sliced bread grew quickly and became a platform on which others could dream and build – in this case new types of spreads and jams.
Sometimes a simple idea – like digging ditches – can change the world. Before most cables ran underground, all electrical, telephone and telegraph wires were suspended from high poles, creating strange and crowded streetscapes.
On this day in 1906, the Wright Brothers were granted a patent for their “flying machine.” In honor of the anniversary, we reprint this – one of our most popular, most-read pieces.
(Original publish date: April 17, 2013)
The process of productive capital allocation is a critical ingredient of innovation and job growth. Entrepreneurs spending their own (and their partners’) money will create more jobs, more innovation, and a more vibrant economy than politicians picking winners and losers based on cronyism, campaign contributions, and constituent pork.
When government strays out from funding basic research into either applied research or the means of production, the results range from poor to scandalous. Ideas are infinite, and in the absence of competent execution, they are worth nothing. Even if the idea has merit, the true expertise is crowded out. There are better ways policymakers can help encourage innovation.
The invention of the airplane provides an excellent example. While we’re all aware it was the Wright Brothers, many interesting details about funding the innovation don’t make it into school textbooks. In A Tale of ‘Government Investment’ Lee Habeeb & Mike Leven recount the race between the bicycle shop owner/operators and the government-backed head of the Smithsonian.
Who better to win the race [to powered flight] for us, thought our leaders, than the best and brightest minds the government could buy? They chose Samuel Langley. [The War Department gave Langley $50,000, an enormous sum at the time, which The Smithsonian augmented with taxpayer funds of its own.] You don’t know him, but in his day, Langley was a big deal. He had a big brain and lots of credentials. A renowned scientist and a professor of astronomy, he wrote books about aviation and was the head of the Smithsonian. It was the kind of decision that well-intentioned bureaucrats would make throughout the century — and still make today. Give taxpayer money to the smartest guys in the room, the ones with lots of degrees. They’ll innovate and do good for us.
For that Solyndra-type investment the country got the “Great Aerodrome,” which “fell like a ton of mortar’ into the Potomac River – twice. Representative Gilbert Hitchcock of Nebraska remarked, “You tell Langley for me that the only thing he ever made fly was government money.”
Nine days after that second failed test flight, a “sturdy, well-designed craft, costing about $1000, struggled into the air in Kitty Hawk.”
How did two Ohio brothers accomplish what the combined efforts of the War Department, The Smithsonian, and other people’s money could not? The authors cite James Tobin’s To Conquer the Air: The Wright Brothers and The Great Race for Flight (2004) to provide a few answers:
- Langley saw the problem as one of power: how to go from zero to 60 in 70 feet, the stress of which was too great for the materials used. The Wright Brothers, inspired by the practical skills and insights gained from tinkering in their bike shop, understood the problem was one of balance (on a bike, balance+practice = control). They invented the three-axis control (pitch, yaw, roll) still standard on fixed-wing aircraft today. Their entrepreneurial technical expertise was an advantage neither the government nor other private competitors (Alexander Graham Bell) could match.
- Since they couldn’t afford repeated test flights the Wright Brothers were forced to develop a wind tunnel to test their aerodynamics. This saved money and time, since they weren’t bogged down repairing the wrecks of a flawed design.
- No government money also meant no government strings. They were freer to experiment and innovate without worrying about non-essential requests and hidden agendas. They also managed to do more with less since they couldn’t afford subsidy-induced waste.
Habeeb & Levin also offer this fascinating, if not unexpected, coda:
Though the Wrights beat Langley and the Smithsonian, the race didn’t end there. Powerful interests vied for the patent to this revolutionary invention and, more important, for the credit for it. With Smithsonian approval, a well-known aviation expert modified Langley’s Aerodrome and in 1914 made some short flights designed to bypass the Wright brothers’ patent application and to vindicate the Smithsonian and its fearless leader, Samuel Langley.
That’s right. The Smithsonian’s brain trust couldn’t beat the bicycle-shop owners fair and square, so they used their power to steal the credit. And then they used their bully pulpit to rewrite history. In 1914, America’s most esteemed historical museum cooked the books and displayed the Smithsonian-funded Langley Aerodrome in its museum as the first manned aircraft heavier than air and capable of flight.
Orville Wright, who outlived his brother Wilbur, accused the Smithsonian of falsifying the historical record. So upset was he that he sent the 1903 Kitty Hawk Flyer, the plane that made aviation history, to a science museum in . . . London.
But truth is a stubborn thing. And in 1942, after much embarrassment, the Smithsonian recanted its false claims about the Aerodrome. The British museum returned the Wright brothers’ historic Flyer to America, and the Smithsonian put it on display in their Arts and Industries Building on December 17, 1948, 45 years to the day after the aircraft’s only flights. A grand government deception was at last foiled by facts and fate.
As for Samuel Langley, he died in obscurity a broken and disappointed man. Friends often noted that he could have beaten the Wright brothers if only he’d had more time — and more government funding.
Some things never change.
The Wright brothers’ airplane business never took off (groan) due to a combination of poor business decisions and sloppy patent work. Wilbur sadly died young (in 1912 at age 45, of illness that some suspect was contracted due to exhaustion from the patent battles) and Orville sold the company in 1915. So the industry grew under the leadership of other companies and other men. (Although the Curtiss-Wright Corporation remains in business today producing high-tech components for the aerospace industry.) One can’t help but wonder what the original inventors might have done had they been the beneficiary of a strong partnership with a VC fund…
Good article in Entrepreneur about how true success is not possible unless you build great relationships. The piece hits several themes that we believe are critical to a successful vc-entrepreneur marriage: maintaining long term relationships, communicating good news and bad, promoting honesty in business, how useful failures can prevent epic ones, and maximizing board effectiveness.
The chemistry between entrepreneur and venture partner in private companies is more cooperative, longer-term, and (mercifully) not subject to the quarterly reporting pressures of public companies. Both will have real “skin in the game” and the same incentive to understand the nuances of the business and focus on long term value creation.
You will spend a great deal of time, effort, and money together with a new partner, so the chemistry ought to be productive and enjoyable. It should add conviviality in the good times and take the edge off the bad times.
Here are a few highlights from the article “How Successful People Build Exceptional Professional Relationships.”
They help without having to be asked.
People who build great relationships pay close attention so they can tell when others are struggling. Then they offer to help… but not in a general, “Is there something I can do to help you?” way. Instead they come up with specific ways they can help.
That way they can push past the reflexive, “No, I’m okay…” objections and then roll up their sleeves to make a difference in another person’s life.
And they do it not because they want to build a better relationship — although that is certainly the result — but simply because they care.
They take the undeserved hit.
She’s willing to accept the criticism or abuse because she knows she can handle it — and she knows that maybe, just maybe, the person who is really responsible cannot.
Few acts are more selfless than taking the undeserved hit. And few acts better cement a relationship.
They answer the question that was not asked.
Where relationships are concerned, face value is usually without value. Often people will ask a different question than the one they really want answered… Behind many simple questions is often a larger question that goes unasked. People who build great relationships listen carefully to discover what lies underneath so they can answer that question, too.
They step up when they have acted poorly.
Responsibility is a key building block of a great relationship. People who take the blame, who say they are sorry and explain why they are sorry, who don’t try to push any of the blame back on the other person… those are people everyone wants in their lives, because they instantly turn a mistake into a bump in the road rather than a permanent roadblock.
They know when to dial it back.
People who build great relationships know when to have fun and when to be serious, when to be over the top and when to be invisible, and when to take charge and when to follow.
Great relationships are multifaceted and therefore require multifaceted people willing to adapt to the situation — and to the people in that situation.
They value the message by always valuing the messenger.
Smart people strip away the framing that comes with the source — whether positive or negative — and consider the information, advice, or idea based solely on its merits.
People who build great relationships never automatically discount the message simply because they discount the messenger. They know good advice is good advice, regardless of where it comes from.
And they know good people are good people, regardless of their perceived “status.”
This is the most recent item in a long run of stories describing a geographic analog to the process of creative destruction. Those states who spray “startupicide” on the economy – suffocating regulations, inflated business taxes and fees, lawsuit-friendly legal environments, and political classes uninterested in business concerns, if not downright hostile to them – lose economic clout as people and capital migrate to other states with more favorable environments in which to work and live.
Local evidence of this trend can be found in this story, in which the U.S. Census Bureau reports
Three metro areas in Florida were among the nation’s 10 biggest gainers in the number of people moving there last year, and another three Florida metro areas were in the top 10 for overall growth rates.
Our hometown Tampa was #5 in the nation in 2016 population growth.
This migration of economic clout within the US has been more subtle than the California Gold Rush or Irish Potato Famine but is just as significant. Some states are chasing away their earners, workers, and entrepreneurs; this is their tax base.
The growth corridors of the high-tech South would have a mercantile-like advantage but for the fact that employers can (and do!) simply move in order to thrive under our growth-oriented tax policies, lower public sector debt burdens, stronger job creation, excellent climate for entrepreneurs, and a superior overall business climate. (The actual climate happens to be conducive to a great quality of life as well.)
We have written from time to time on the question of which legal structure is best suited to private growth companies looking to raise outside growth capital. Not surprisingly, there is no one right answer to the question, but recent tax legislation should compel entrepreneurs to give serious consideration to the C-corporation structure.
This article in last week’s Business Observer contains important news about the potential tax benefits of a C-corporation for entrepreneurs and their investors.
However… just as people shouldn’t decide to have children for the tax benefits, we advise founders to not view tax considerations in a vacuum when choosing the legal structure for their businesses. They need to think hard about the long term goals for the business and seek expert advice on the optimal legal structure.
The author of the article (Pamela Schuneman, C.P.A.) first argues that the prospects of federal tax reform may tip the scales towards choosing a C-corp:
Now, with tax reform on the horizon and a push to lower the corporate tax rate, current tax savings on C Corporation earnings could be substantial if the corporate rate drops to 15% and the top individual rate only drops to 33%. That’s an 18% difference — $18,000 more on $100,000 of income.
It’s a little more accurate to say the corporate rate drops “closer” to 15%, which compares favorably to an LLC structure where investors are taxed at their individual income tax rates on income that is “passed through” to investors.
Next she explains that a 1993-era tax provision governing a type of capital gains, originally scheduled to expire at the end of 2010, has been made permanent. And this change, in our view, is a potential game changer.
The gain exclusion for Sec. 1202 was originally set [now made permanent – ed] at 50% for stock acquired [in private C corps – ed] on or after Aug. 11, 1993, increased to 75% for acquisitions after Feb. 17, 2009, and expanded to a full 100% exclusion for acquisitions after Sept. 27, 2010.
The 2010 law also removed of one of the main drawbacks of this tax provision – the alternative minimum tax preference.
In a nutshell, Sec. 1202 allows taxpayers (other than corporations) to exclude from federal income tax 100% of the gain from the sale of qualified small business stock (“QSBS”). The amount of gain excluded is limited to the greater of $10 million or 10 times the adjusted basis of the investment.
There are requirements to qualify for the tax break, which we outline below. But first we’d like to share one more excerpt from the article to emphasize the importance of this legislation to founders and their investors:
For example, Tom and Jane decide to start a software development business. They purchase stock for $10,000 each and have a 50-50 ownership interest in the C Corporation. The stock is eligible for Sec. 1202 treatment if held for five years. In six years, they sell the stock of the company to Google for $10 million. They each have a $4,990,000 gain on the sale of the stock and their tax on the transaction is zero.
Of course we see this as a positive development for the high-growth companies responsible for all net job growth in our economy. Reasonable people will disagree on what tax rates should be. But can we at least agree that there are some forms of investment activity which promote economic growth, and that those forms ought to be encouraged, perhaps with favorable tax treatment?
RELATED STORY: Warren Buffett and after tax returns
If a company’s stock is qualified small business stock (QSBS) then the Internal Revenue Code (§1202) provides a tax break on the equity investments. To qualify as QSBS and for the 0% federal tax rate on gains from the sale of QSBS, the following requirements must be met:
1.) Original issue. The taxpayer recognizing the gain must be an individual, partnership, S corporation or estate and must have acquired the stock at original issue from a US domestic C corporation.
2.) Five-year holding period. The taxpayer must have held the stock for more than five years prior to selling the stock.
3.) After September 27, 2010. The taxpayer must have acquired the stock at original issue after September 27, 2010, in exchange for cash, property other than cash or stock, or services.
4.) $50 million Gross Assets Test. The aggregate gross assets of the corporation that issued the stock cannot have exceeded $50 million at the time of (including immediately before and after) the issuance of the stock to the investor.
5.) Active Business Test. During substantially all of the taxpayer’s holding period of the stock, at least 80% of the issuing corporation’s assets must be used by the corporation in the active conduct of one or more qualified trades or businesses. (Certain types of businesses, including some pure service businesses like consulting firms or doctor practices, don’t qualify, but many businesses do.)
6.) No significant redemptions. The issuer of the stock must not have engaged in specific levels of buybacks (redemptions) of its own stock during specified periods (typically one year) before or after the date of issuance of the stock to the taxpayer.
The amount of gain eligible for this 0% rate is subject to a cap, however. Section 1202(b)(1) states that the aggregate amount of gain for any taxpayer regarding an investment in any single issuer that may qualify for these benefits is generally limited to the greater of (a) $10 million, or (b) 10 times the taxpayer’s adjusted tax basis in the stock. For a taxpayer who invests cash in the QSBS, basis would generally be equal to the cash purchase price.
Like all issues tax-related, entrepreneurs need to consult with their tax counsel and accounting firm to determine if their businesses qualify for QSBS status. If a business does qualify, an entrepreneur must decide whether these potentially significant tax savings outweigh other considerations. In our view, Congress has now put its thumb on the scale firmly on the side of choosing the C-corporation structure.
The WSJ recently analyzed NFL play calling this season and concluded that the coaching profession could use more risk-takers. Despite “a legion of mathematicians, economists and win probability models urging them to take more chances“ most NFL coaches “reach for the conventional choice by habit.”
The Journal analysis examines how coaches played their hand this season across three broad categories of game management: fourth downs; play calling (blitzing on defense; passing on early downs or with the lead on offense) and special teams (going for a 2-point conversion and onside kicks when ahead)…
University of Pennsylvania professor Cade Massey, who researches behavior and judgment, said many NFL coaches habitually choose to postpone the certainty of losing in football for as long as possible—even if doing so actually lowers the likelihood of winning in the end, such as opting to punt on fourth-and-short in overtime…
There is some evidence that coaches are seeing the benefits of riskier decisions. They are just becoming more aggressive at a very conservative pace.
In a 2002 paper, University of California Berkeley economist David Romer expressed hope that coaches would begin acting rationally in maximizing odds of victory when the related data became more widely available. And this year, coaches have gone for it on fourth down needing two yards or less 29.7% of the time—converting nearly two-thirds of attempt).
That’s up from 23% just before Romer published a paper entitled, “It’s Fourth Down and What Does the Bellman Equation Say?” Alas, at the present rate, going for it nearly all the time as the models advise would take over 100 years.
We think this is an excellent illustration of two ideas relevant to starting and running a high-growth company, over and above the obvious exhortation to take intelligent risks: (1) the opportunity for a contrarian advantage and (2) the combination of data and gut instincts required to make the right call.
First, an excerpt from our 12/8/14 post, We challenged the dogma, and it was incorrect:
[The story about EOG Resources, a discarded division of Enron ] is an absorbing look at the “shale revolution” and touches on several of our favorite themes: iterative collaboration, how to fail the right way, the incremental, adaptive ways by which success is achieved, and even the role of luck – although we’d describe it a bit more favorably as “serendipity.”
EOG is a great example of a contrarian definition of entrepreneurship: see economic value where others see heaps of nothing, combine the self-confidence to defy conventional wisdom with the determination to overcome obstacles, and distinguish yourself more by the ability to achieve the impossible than the originality of your thinking.
Next, an excerpt from our 4/13/16 post, The Hidden Power of Trusting Your Gut Instincts:
(S)tudies show that those who rely on intuition alone tend to overestimate its effectiveness. They recall the times it served them well and forget the times it didn’t. Keeping a list of every time intuition is your only guide might be eye-opening.
“Common sense” justifications can be found for almost any conclusion, and as a result it can be shockingly unreliable and something that we over-rely on to the exclusion of other methods of reasoning. Here’s how we put it in Everything is obvious once you know the answer:
It is “rarely practical to run the perfect experiment” before making a decision but we can be “more deliberative and reflective as we gather and analyze facts to inform our decisions.” When we over-rely on common sense alone, we risk “rejecting a more thorough effort to solve a problem and settling for an easy one.”
… In our experience the best results often come from a combination of deliberation and intuition.
Finally, in the spirit of the (NFL playoff) season, we’d like to recommend two other pieces about NFL coaches that speak more to leadership challenges than data-driven decision making.
From 1/29/13, The imperfect perfectionist. On the extent and limits of Bill Walsh’s innovative genius:
Coach Walsh’s West Coast Offense won the 49ers four (or five) Super Bowls, spawned copycats around the league and forced defenses to innovate in response. Not a bad day’s work. But obsession with perfection left him badly burnt out and his organization unable to implement his vision without him.
From 2/8/15, The NFL’s Best Coach*. On the extent and limits of Bill Belichick’s… innovative genius:
We suspect his efforts to gain those “edges off the field” will also be a permanent part of his legacy. His team hasn’t been in 6 Super Bowls over 15 years because of deflated balls, or illicitly videotaped signals, or (pre-Belichick) a snowplow driven by a convict on work release. But you earn the reputation and invite the asterisks when you proudly display that same snowplow in an exhibit at your stadium.
To paraphrase the old adage: reputations are built over the long-term, and can be forfeited in just a moment. In our business failure can be counted on to make (at least) a cameo, so it’s critical to learn how to fail the right way and make a distinction between business failure and personal failure. An entrepreneur (or coach?) can try too hard to avoid an enterprise failure and pressure himself into a career-damning ethical lapse.
We were immensely impressed reading about ultra-marathon runner Karl Meltzer’s hiking of the entire Appalachian Trail recently. Meltzer averaged an insane 47 miles of hiking a day for 45 consecutive days to accomplish this record. While we are no endurance athletes ourselves, we thought that Meltzer’s feat held some relevance for the endurance test that is entrepreneurialism, so we dug a little deeper to find out how he went about accomplishing this incredible feat.
As is detailed in the New York Magazine article linked above, Meltzer used some of the following tenets to guide his efforts in hiking the Appalachian Trail. We’ve added some thoughts below on several of the principles as we believe each applies to building a growth company.
For Meltzer, this concept meant not going out too fast too early when he felt great at the beginning of his hike. For an entrepreneur, we believe “pacing oneself” is very sound advice in building a great company. The business media loves to glorify once-in-a-lifetime, strike-it-rich successes like WhatsApp’s sale to Facebook, before real businesses have been built and products monetized. From our experience, we know that such successes do happen in each market upswing, but these are very rare; a more likely path to success comes from disciplined adherence to sound business principles over many years. For an entrepreneur, building a company can feel a bit like Sisyphus pushing the rock up a hill, but one customer will lead to another customer, and on and on it will go. Along the way, it is important to celebrate the successes as they come but not get too frustrated if they don’t come all at once.
Beat and broken down? Focus on what you can control
For Meltzer, he had an injury mid-hike, and he knew that an injured shin could be potentially disastrous for his attempt to break the record in hiking the Appalachian Trail. Much to Metzer’s credit, he had the mental discipline and energy to focus on those small steps which were right in front of him, and this focus allowed him to overcome the adversity. For an entrepreneur, this tenet is a great analog to focusing on what one can control along the growth company path. Along the journey, large customers may promise that they are going to buy and then go silent; investors may seem interested but then get cold feet; board members may give contradictory advice. It is critical that an entrepreneur focus on what he or she can control within his or her own company, building the team along the way with people who are trustworthy, smart, and driven. Success is more likely to come from a thousand prudent decisions along the way, not one dramatic thunderbolt as portrayed in the movies.
We have to admit that this may have been our favorite of Metzer’s tenets. As minority growth investors, we have to live by this credo, as we are not in control of the companies where we invest and most of the success in our portfolio comes from the hard work of the team on the ground. We are passionate about entrepreneurs and know how hard it is to build a great growth company, so we always try to thank our portfolio companies for their hard work whenever we can. In much the same way, an entrepreneur is only as strong as the team that she builds around her, so investing in a culture where expressing gratitude is the norm makes so much sense to us. People work harder when acknowledged for their contributions, and it takes a team to build something truly special.
Focus on the process
Metzer knew that he couldn’t do the whole hike in one fell swoop, so he broke the hike down into its component pieces which made the daunting task seem more manageable. Similarly, we often counsel our entrepreneurs to build sustainable processes into their companies so that they and their employees can replicate tasks easily and are not as exposed to human error when building a company. By giving employees clearly defined processes which allow them to focus on what’s really important, an entrepreneur greatly increases the chances that his company will be successful. It is easy to look at the totality of what needs to happen to scale a business and become overwhelmed; by breaking the greater task into its component parts and then putting a process around each, an entrepreneur has a much greater likelihood of success.
It turns out that hiking the Appalachian Trail faster than anyone else ever has is really hard! Metzer knew that it would be difficult, but he embraced the struggle and accomplished something remarkable. We don’t know any other way to say it, so we’ll just be blunt – building a successful growth company is really hard! However, the rewards, both monetary and intrinsic, can be well worth the struggle, but an entrepreneur must enjoy the journey along the way and recognize that it will be very hard, with many peaks and valleys. A successful exit will likely be monetarily life-changing for many of the employees at a successful growth company, but we have found that most entrepreneurs look back at the journey and struggle of building a team, getting a product to market, winning (or losing) a customer as the fondest memories of their entrepreneurial journey. Enjoy the struggle – it will go by fast and you’ll create a lifetime of memories with great people along the way if you laugh at yourself during the tough times and then celebrate the successes along the way.
And drink coffee
This was our favorite of Metzer’s tenets! And the only one we can say with confidence we have fully mastered.
The National Venture Capital Association (NVCA) has sent a letter to President-elect Donald Trump outlining how the entrepreneurial ecosystem is the key to creating new jobs and economic opportunity for Americans who feel left behind by the modern economy.
The letter outlines an agenda crucial for supporting entrepreneurship and building a strong economy in all areas of the country, including: a tax policy that encourages new company formation; making capital markets work for small-cap companies; encouraging talented immigrants to build or work at American startups; making life-saving medical innovation a reality; increasing basic research investment; and other key policies that would bolster the entrepreneurial ecosystem and foster new company creation.
The NVCA’s letter opens with a brief paean to entrepreneurship:
Entrepreneurship is the key to expanded economic opportunity in the United States. From FedEx to Genentech, entrepreneurs have fueled growth and expanded opportunity across the American economy. America’s venture capitalists have been hard at work supporting these startups with tremendous growth potential in areas like personalized medicine, next-generation computing, 3D printing, and synthetic biology.
Young companies, many of them venture-backed, create an average of 3 million new jobs a year and have been responsible for almost all net new job creation in the United States in the last forty years. In addition, venture capital has backed nearly half of all companies that have gone public since 1974, which have collectively been responsible for 85 percent of R&D investment during this period. In short, while a small industry by relative standards, venture capital is mighty in its outsized role in supporting economic activity and creating growth and economic opportunity.
27,000 U.S. venture-backed startups have received $290 billion in funding—and 11,000 of those received funding for the first time—since 2012. To put this into perspective, that calculates to about $170 million invested into 15 startups each day. An underappreciated truth is that startup activity has proliferated in the middle of the country in recent years. Since 2012, nearly half of all startups receiving venture capital backing have been based outside of California, Massachusetts and New York. Specifically, about 12,900 venture-backed companies in the other 47 states have raised $83 billion in funding since 2012. What’s more, the collective annual growth rate of companies receiving funding in these states (10.1%) has exceeded that of the top three states.
We highlight/excerpt three of their recommendations below, but we also encourage all our readers to check out the NVCA’s letter in its entirety. (We also provide a few links to some of the relevant Greatest Hits here at Navigating Venture.)
1. Support tax policy that encourages new company formation. Since the Reagan Administration, our tax code has been relatively effective at encouraging patient, long-term investment, but on net has been hostile to entrepreneurial companies. For example, punitive loss limitation rules punish startups for hiring or investing in innovation, while benefits such as the R&D credit are inaccessible to startups. Unfortunately, tax reform conversations in Washington have ignored these challenges while at the same time proposing to raise taxes on long-term startup investment to pay for unrelated priorities.For instance, carried interest has been an important feature of the tax code that has properly aligned the interests of entrepreneurs and venture investors since the creation of the modern venture capital industry. Increasing the tax rate on carried interest capital gains will have an outsized impact on entrepreneurship due to the venture industry’s longer holding periods, higher risk, smaller size, and less reliance on fees for compensation. These factors will magnify the negative impact of the tax increase for venture capital fund formation outside of the traditional venture regions on the coasts.
- Where are the start-ups?
- The love of taxes is the root of unhappiness
- Job creation and the carried interest: venture capital firms are different from hedge & buyout funds
- Is the secret to national prosperity large corporations or start-ups?
- The incredible VC jobs machine
- Lost: $1 trillion
2. Reform the regulatory state to bolster startup activity. When Washington piles on new regulations it is startups who are most adversely affected because these young, high-growth companies do not have the resources to navigate the regulatory state like large companies. At the same time, government red tape is inhibiting government entities from tapping into venture-backed innovation in fields such as cybersecurity due to challenges with the government acquisition process.
- Regulation of complex adaptive systems
- This is the disclosure gap the SEC is worried about?
- Manage to the rules (only) and you’ll tiptoe right up to the hot red line
3. Make life-saving medical innovation a reality. The future has never been brighter in terms of scientific and health care discoveries that are on the horizon. Venture capital is investing in revolutionary medical innovation and groundbreaking treatments and cures that are aimed at diagnosing, treating, and curing the deadliest and costly diseases.
Unfortunately, medical innovation is at risk unless policymakers adopt modern approaches to development, regulation, and reimbursement for medicine and medical devices. Progress has been made to streamline the regulatory approval process at the Food and Drug Administration, particularly for novel technologies, but more improvements are needed. In addition, we need to establish pro-innovation approaches to reimbursement at the Centers for Medicare and Medicaid.
Every child in America learns of the hardships endured by the Pilgrims as they established Plymouth Colony. Some lucky ones even learn how the Pilgrims found salvation via private property, division of labor, and capitalism. The luckiest ones of all learn about capital preservation when a venture capital investment fails.
When a group of Puritans known as “Separatists” fled England they first settled in the Netherlands, where they took menial jobs and over time grew to miss their native culture. They lacked the resources for a passage to North America, so they sent two entrepreneurs from their congregation to London to seek financial backing – a successful merchant named John Carver and Robert Cushman, a “wool comber of some means.” While those two were in London, an ironmonger (a dealer in metal utensils, hardware, locks, etc.) from that city named Thomas Weston was visiting one of Carver’s in-laws in the Netherlands and learned of the Pilgrims’ need for funds.
Whether we call that serendipity or opportunistic networking, it resulted in Weston putting together an investor group to back the voyage. Weston and his London Merchant Adventurers put up 7000 pounds and also recruited experts to assist with the enterprise: roughly 50 additional settlers with the vocational skills to help build a colony in the new world. These “non-Separatists” crammed aboard the Mayflower with the Separatists and together became known as the Pilgrims.
What happened to that £7000 investment, you ask? Here is the story as told at encyclopedia.com
Weston and his fellow investors were dismayed when the Mayflower returned to England in April 1621 without cargo. The malnourished Pilgrims had been subjected to “the Great Sickness” after the arrival at Plymouth, and the survivors had had little time for anything other than burying their dead and ensuring their own survival. Weston sold his London Merchant Adventurer shares in December, although he did send a ship, the Sparrow, in 1622 as his own private business venture.
The Pilgrims attempted to make their first payment by loading the Fortune, which had brought 35 additional settlers in November 1621, with beaver and otter skins and timber estimated to be worth 500 pounds. The ship was captured by French privateers and stripped of its cargo, leaving investors empty-handed again.
A second attempt, in 1624 or 1625, to ship goods to England failed when the Little James got caught in a gale in the English Channel and was seized by Barbary Coast pirates. Again the London Adventurers received nothing for their investment. Relations, always tempestuous between the colonists and their backers, faltered.
Facing a huge debt, the Pilgrims dispatched Isaac Allerton to England in 1626 to negotiate a settlement. The Adventurers, deciding their investment might never pay off, sold their shares to the Pilgrims for 1,800 pounds. Captain Smith, of the failed Jamestown venture, felt the London Merchant Adventurers had settled favorably, pointing out that the Virginia Company had invested 200,000 pounds in Jamestown and never received a shilling for their investment.
By our back-of-the-envelope calculation, the investors got back 26% of their invested capital. If only they’d kept their long-term perspective…
On a more serious note, that outcome fits into the first category of entrepreneurial failure listed in Fail the Right Way and reflects well on those involved:
- Liquidate all assets, investors lose most/all money: 30-40%
- Not realizing the projected return: 70-80%
- Falling short of initial projections: 90-95%
With “failure” this common, he urges executives to distinguish between business failure and personal failure. It’s vital to not let the former, which can be a valuable learning experience, pressure you into the latter, which can become a career-damning ethical lapse:
Although the original backers did not get the return for which they’d hoped, the endeavor ultimately succeeded thanks to the intrepid settlers who displayed many of the noble traits found in entrepreneurs: flexibility (they had to settle further north than intended), persistence (through brutal hardships), the value of good partners (Squanto and the Wampanoag tribe), and the courage and optimism necessary to accomplish the impossible and stupid.
“All great and honorable actions are accompanied with great difficulties, and both must be enterprised and overcome with answerable courage.”
– William Bradford, 2nd, 5th, 7th, 9th & 11th Governor of Plymouth Colony
Our business – like every business – has its ups and down, but we have much to be thankful for. Much. So we’d like to take this opportunity, here at NVSE, to give thanks for the trust and patience of our Limited Partners, the initiative and dedication of our entrepreneurs, the support provided to them by the many friends in our network, and the nation that offers the freedom to pursue happiness. We love our work, have been blessed with terrific successes and honorable failures, and get to do it all with great people in beautiful weather. God Bless you and your families – we hope you have a wonderful Thanksgiving.